Your guide to the Money Purchase Annual Allowance

Your workplace pension pots, or any self-invested personal pensions (SIPPs) you hold, are often referred to as “money purchase” or “defined contribution” (DC) schemes.

These pensions are managed by a provider that normally invests contributions on your behalf. Then, once you reach normal minimum pension age (NMPA) – currently 55, rising to 57 by 2028 – you can begin to draw from the pension.

Although you can take the whole pension as a lump sum if you wish, this is not usually a favourable course of action. Most people opt to leave what they don’t need in the pension, where it can continue to grow.

Dipping into your pension whenever you choose is called “flexibly accessing your pension” or “flexi-access”. This is usually a tax-efficient way to draw from your pension, and many benefit from it. But there is one government regulation that is triggered when you opt for flexi-access: the Money Purchase Annual Allowance (MPAA).

Although it might sound complicated, it is important to understand the fundamentals of the MPAA. If you don’t, you could pay more tax than you need to when you start taking your pension.

Here is how the MPAA works.

The Money Purchase Annual Allowance is a tapered version of the full pension Annual Allowance

To understand the MPAA, you need to know about the standard pension Annual Allowance.

As of the 2025/26 tax year, the Annual Allowance is the maximum amount you, your employer, or anyone else can put into a pension without triggering an additional tax charge. You can carry forward any unused Annual Allowance from the previous three tax years.

• If your “threshold income” – your income minus the amount you have paid into a pension – is £200,000 or less, your Annual Allowance is £60,000.
• Once you cross the £200,000 threshold or your adjusted net income – your income plus any employer contributions or the amount your defined benefit (DB) pension has grown by – is £260,000 or more, your Annual Allowance tapers down. It falls by £1 for every £2 of income above £260,000.
• Once your adjusted net income reaches £360,000 or more, your Annual Allowance tapers down to the minimum of £10,000. At this level, you can only contribute £10,000 a year into your pension(s) without triggering a tax charge.

So, what does this have to do with the MPAA?

Once you have flexibly accessed your money purchase pension, even if you are still working and earning, you trigger the MPAA. As a result, no matter how much you earn, your Annual Allowance immediately tapers down to £10,000 a year.

Triggering the Money Purchase Annual Allowance limits how much you can tax-efficiently reinvest into your pension

Picture this: you reduce your working hours at age 60, planning to retire fully at 65. You begin to dip into your pension, drawing only small amounts when you need to top up your income.

At the same time, you plan to continue paying pension contributions through your employer. Unknowingly, your contributions exceed the MPAA of £10,000 and trigger a tax charge.

The amount you pay in tax will vary depending on your marginal rate of Income Tax, how much you have exceeded the MPAA, and other factors. The point is, it’s your job to remain aware of when you have triggered the MPAA and ensure your pension contributions are reduced accordingly.

Using tax-efficient ISAs could prevent you from exceeding your Money Purchase Annual Allowance

If you wish to continue saving and investing throughout your retirement, you may be disappointed that the tax-efficient £60,000 Annual Allowance is no longer available once you flexibly access your pension.

Remember, though, that pensions are not the only tax-efficient vehicle for saving and investing.

Your Individual Savings Accounts (ISAs) have a £20,000 contribution limit across all the adult accounts you hold. For instance, if you have a Cash ISA and a Stocks and Shares ISA, you can contribute up to £20,000 a year across both.

Lifetime ISAs (LISAs) fall within this scope, but they also have their own individual limit of £4,000 a year.

In any case, if you maximise your pension contributions within the boundaries of the MPAA, you could then turn to ISAs to tax-efficiently invest and save.

• ISA gains are not subject to Capital Gains Tax, Income Tax, or Dividend Tax
• Unlike your pension, you can withdraw from your ISAs without triggering any tax charge.

Blending pension investments with ISA savings and investments throughout retirement could be a great way to adapt after triggering the MPAA – and may make your income more tax-efficient overall.

As with any saving and investing strategy, it is wise to seek professional advice from a qualified financial planner.

Get in touch

Our financial planners are well versed in handling complex pension and tax situations. If you are looking to achieve peace of mind and retire with a solid foundation of wealth, working with us could help.

Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

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